All Recessions Are Local

The Daily Reckoning Presents: An “up-close-and-personal” look at the recession as it wends it way through the once booming Denver tech center.


Like politics, all recessions are local.

They take root in auto showrooms and appliance stores, then slowly steal into the malls, choking off jewelry stores, stereo dealers, restaurants, clothiers and ski shops before creeping right up to your neighbor’s door.

So far, that’s the way recession seems to be playing out in my Colorado neighborhood. The heart of it is a $250 million mall that opened nearby about18monthsago. The complex was starting to feel the pinch even before September 11, but since then, pedestrian traffi has fallen precipitously.

Near the south end of the mall is the shell of a 16- screen AMC theater that is scheduled to open in late autumn. It is no more than three or four miles from an AMC 24-plex and a 12-screen Mann Theater that has been operating in bankruptcy for more than a year.

There are three new brewpubs within this radius, each displaying those huge stainless steel tanks in the front windows. Close by are five or six very large, non-chain restaurants either under construction or recently opened

One of them sits across a terra cotta plaza from the big AMC – a fancy Japanese steak house with enough room to easily contain a hockey rink. The space had sat empty for more than a year, just like several other cavernous storefronts that went into hibernation when the giant mall opened just across the road.

Considering the landlord’s predicament, the steak house undoubtedly was able to negotiate a very favorable lease. But can it survive? I doubt it. For, every time I’ve walked by the restaurant on my way to the movies, waiters and cooks have outnumbered diners by more than two-to-one.

A few doors down, on weeknights at least, there are rarely more than faint signs of activity at Dave & Buster’s, an expo hall-size adult arcade with sumptuous bars, a restaurant, dinner theater and a billiard parlor. Only the steady hum of electrical current feeding into the video machines, the somewhat disconcerting watchfulness of a very attentive staff, and an occasional ka-ching hint that the place is open for business.

Even that seemingly irrepressible haberdasher, George Zimmer, seems to be dying in this locale. I went into The Men’s Wearhouse to buy some slacks not long ago and there were five sales clerks waiting to pounce

When I returned the next day to pick up the pants after having them altered, the same hungry-eyed bunch were loitering near the tie racks. They briefly snapped to attention before realizing it was just that guy coming in to pick up his slacks.

To round out the picture, I should mention that Qwest Communications, Level 3, Sun Microsystems and IBM are among the biggest employers in this area. All have announced big layoffs lately, and while that may only get a paragraph or two in your local paper, it is big news around here

Which brings us to my neighbor’s doorstep, in front of which a “For Sale” sign has hung for nearly two months. Until recently, the guy was a top regional producer for one of the largest retail brokerage firms. He left the company to do financial consulting, but could not have timed the move more poorly. To make matters worse, a big client stiffed him for four months of work.

With savings nearly depleted and a dwindling number of clients to bill, he decided it would be a good time to cash out and rent a home. An appraiser had estimated the value of his house at $450,000 – nearly twice what he paid for it just a few years ago.

Hard-pressed and sitting on a large capital gain, one could hardly fault him for wanting to take the money and run.

Now, this story by itself would not be that interesting, except there are at least four other homeowners within a stone’s throw who have refinanced within the last few months. Moreover, each told me of being helped by an “aggressive” appraisal that was significantly higher than what his or her home would actually sell for these days. And each took out cash as part of the transaction.

Would it shock you to learn as well that two of the homeowners are currently unemployed?

So there you have it. Clearly, the banks have so much cash to heap on mortgage borrowers these days that they seem neither to care whether you have an income, nor to anguish over whether your house is worth anything near its appraisal value.

An ironic twist is that the erstwhile financial consultant has found a lucrative sideline: setting up so-called negative amortization loans for other homeowners. This arrangement allows the mortgagee to pay only the interest on a loan, with the unpaid principal getting tacked onto the balance at the end of the year.

He created five such loans just last week, and I shudder to think of how many other entrepreneurs are doing the same kind of charitable work elsewhere.

In a booming economy, it’s not hard to see how such a strategy might tempt imprudence: Buy a house for $300,000, carry it for all of $500 a month, then sell it to the next guy for $450,000.

Unfortunately, it is not boom times but rather the dreadnought of recession that is making this gambit so appealing, if not to say irresistible. Devastated by losses in the stock market and perhaps even jobless, the beleaguered homeowner is capitalizing on the one thing of significant value that he’s got left: his house.

But there is no getting around the fact that in effect, both he and the lender are betting that housing prices will continue to rise. For if both are wrong, the consequences would be almost too scary to contemplate.

Imagine tacking $50,000 onto your mortgage, even as the value of your home is falling more than 20 percent, from $450,000 to $350,000.

This example may sound extreme, but I believe it has already happened here, if not yet all across America. In fact, $100,000 of vanished equity is a reasonable estimate. For the supposed $450,000 home, it is simply the spread between an “aggressive” appraisal made just a few months ago and the current asking price of a “motivated” seller.

Meanwhile, statistics compiled in Washington deign to suggest that this – we’ll call it a recession – is different because it has so far miraculously bypassed the housing sector. But if profligate collusion between homeowners and mortgage lenders is the reason, then the economy is going to be in an inescapable bog sooner than any of us could have imagined.

In fact, the mortgage shell game now occurring in thousands of neighborhoods just like mine is all that is keeping the economy from sinking into coma. Ultimately, however, the frenetic hollowing out of homeowner equity can only help to precipitate economic disaster, including the eventual collapse of housing values in the U.S.

I have long predicted that homes would shed as much as 70% of their peak values during the deflation that has recently begun and which should take at least 8-10 years to run its course. Now, however, because of the epic refinancing mania that is taking place, home values are being set up for a much swifter collapse, perhaps over a period of no more than four or five years.

A housing bust would add overwhelming power to a deflation that evidently has already destroyed the economy’s ability to respond to either fiscal or monetary stimulus.

Anyone who wishes to understand what is about to happen to the economy should purge the word “inflation” from his mind, since it is no more likely than a heat wave in February. No matter how desperately the Fed may try to stimulate, deflation is now the only possible outcome.

As such, we have only just entered a decade of intense and relentless economic pain.

Rick Ackerman,
October 10, 2001

for The Daily Reckoning

Rick Ackerman is a financial writer whose essays have appeared in Barron’s, The Sunday San Francisco Examiner and numerous other publications. Ricks’s detailed strategies and forecasts for stocks, options, and indexes appear daily at Market Wise Black Box.

“The latest rate cuts are probably not going to stimulate a lot of new net borrowing,” said Steve Wood, economist at FinancialOxygen, speaking to a reporter from “It’s really not a cost-of-capital issue for most corporations at this stage. We still have a mass of excess capacity, both domestic and internationally. Business spending is not going to go anywhere no matter what happens to short rates,” he said. “On the consumer side it’s pretty much the same story.”

“I heard a good one on CNBC yesterday,” adds a Daily Reckoning reader, “Rate cuts are like martinis. The first one really feels good. The next few are sort of ho-hum. By the time one comes to the tenth, everyone is numb.”

After 9 cuts, short rates have gotten so low that banks can borrow below the rate of inflation. But people are numb to lower rates. “Banks are not increasing the size of their loan portfolios, as nobody is lining up to borrow,” says the Mogambo Guru. “This is the old ‘pushing on a string,’ where nobody wants to borrow money at any interest rate.”

“Rising consumer debt may stagger households, economy,” warns a headline from the Chicago Tribune. Then, a piercing insight: “More debt and fewer paychecks spell trouble because the combination pushes Americans to rethink their free-spending ways.”


Rate cuts do nothing for credit cardholders. They are still paying 14%. Small wonder credit card delinquencies just hit a 25-year high…FHA loan delinquencies reached a new high, too, in the 2nd quarter

– a little over 10%.But a Fox poll says 71% of Americans are still optimistic about the economy. The dumb schmucks.

Eric…what happened on Wall Street yesterday?


Eric Fry with his eyes on Wall Street:

– After the first two days of bombing in Afghanistan, investors couldn’t reach any clear consensus about whether war is bearish or bullish. But bearish is the early favorite.

– Stocks fell for the second day in a row as the Dow dropped 15 points to 9,052 and the Nasdaq fell more than 2% to 1,570.

– Clearly, war is a “not bullish” development for those being bombed. Then there’s that whole bio-terrorism aspect to the current conflict…we’d have to put in the “not bullish” category, as well.

– The weather is gorgeous in New York this week and the locals are going about their day-to-day activities – frequenting restaurants, refinancing houses and stocking up on antibiotics.

– “Retail purchases of the powerful antibiotic Cipro, the only medicine specifically approved for treatment of inhaled anthrax, are surging in New York City,” the Wall Street Journal reports. As demand for Cipro soars, so does demand for the shares of Bayer AG, the German pharmaceutical company that makes the potent drug. Bayer shares gained 4% yesterday.

– “Bayer is one of those rare win-win opportunities,” says the Fleet Street Letter’s Lynn Carpenter. “The shares are priced well below their intrinsic value, even if the company does nothing but maintain pace.” Lynn recommended the stock (which trades in Germany) on September 27th – before the recent anthrax cases in Florida. They’ve jumped about 10% since. What’s more, Bayer pays a 6% dividend. “This stock is only beginning to rally,” says Lynn.

– But even if the bio-terrorism threat helps to propel Bayer’s share price, could any war ever be bullish for a stock market selling at 35 times earnings?

– Remember that in 1982 the S&P 500 Index sold for eight times earnings. If tomorrow, the stock market were to return to eight times earnings, it would fall 77%.

– But a crash isn’t the only way to restore value to a richly priced market. Instead, stocks might take the Japanese approach: Tread water for a decade or so, while waiting for earnings to catch up. Japanese stocks are still waiting.

– What about Fed rate cuts? Won’t Greenspan jump-start the stock market? For a while perhaps, but interest rate cuts make a poor substitute for earnings nor can they neutralize the gravitational pull of rich valuations. If Mr. Market decides he wants to reestablish the balance between value and price, there’s not much Mr. Greenspan can do. These rebalancing operations are known as “bear markets.” And they’ve been known to occur from time to time. In fact, here’s news…one is happening right now.

– “This is now the second-largest bear market in the past 60 years,” observes James Stack, editor of the Investech. “If it lasts through mid-December, it will then become the longest bear market in 60 years. The carnage is real and so are the losses, with the broad Wilshire 5,000 Index down 39.7% and the Nasdaq index off a whopping 71.8%. The overwhelming majority of investors never imagined such losses were possible.”

– No doubt, this same overwhelming majority of investors is trying to imagine that their losses will turn into gains. They’re trying to imagine that war is bullish, that earnings will rebound next year and that paying 35 times earnings for stocks is a winning investment idea.

– Maybe, if we all close our eyes and wish really hard…

– In short, folks, war is not bullish…until it is won. Down in the trenches on Wall Street, we investors must gird ourselves for a new kind of war. Call it “guerrilla investing.” We’ll need to figure out how to grow our total portfolio, even if the Dow is headed to 5,000. In other words, “buy and hold” may be a strategy best- suited for producing capital losses. We’ll need to be selective, patient, and intelligently diversified. When all else fails, we should not refuse a little luck.

– And what about the bond market? Is war bullish for bonds? “Looks like a good time to own debt rather than service it,” says Bill. “Unlikely,” I say. Stay tuned…


Back in Paris…

*** Yes, stay tuned. It should be an exciting show…

*** What’s this? The most recent figures suggest that personal savings rates are shooting up – to 4%…from 1% a month or so ago. (As a point of reference, people saved 9% of their incomes in the early ’80s.) Uh oh… despite the ravings of public officials and people who should know better, the disaster of financial prudence is already upon us. People are growing cautious.

*** Each percentage point of savings takes about $75 billion out of the economy. And each 1% decline in stocks knocks off another $100 billion or so of wealth.

*** That’s why I’m bullish on deflation, Eric. Mr. Greenspan and the new homeland defense initiatives may put a few billion dollars into the economy…but Mr. Market destroys far more than that. As Japan shows us, you can pour all the concrete you want…and practically give money away…and it still won’t get you out of a liquidity trap. Deflation has to run its course before inflation can take over.

*** A modest prediction: when Greenspan-san began cutting rates the fed funds rate was 6.5% and the savings rate was near zero. Before the present trend is exhausted, the savings rate will be 6.5% and the fed funds rate will be near zero.

*** The cyber-thugs are still at it…”The night before last,” says Christoph Amberger, who heads up one of our publishing groups, “it looks like these self-appointed Blockwarts – that’s not a dermatological condition, but the unpleasant Nazi functionary who was in charge of snooping into other people’s business – managed to incite every socially dysfunctional high school hacker from Jersey to Atlanta to attack our sites.”

Not all readers are affected, but if you’re getting the Daily Reckoning a day late (or not getting it at all!)… that’s why. Again, I’ll keep you posted.

The Daily Reckoning